FINAL RULE - FLSA REVISIONS RE: FLUCTUATING WORK WEEK OVERTIME

On April 5, 2011, the Wage and Hour Division of the U. S. Department of Labor published a "Final Rule" in the Federal Register amending the Fair Labor Standards Act (FLSA) regulations which will almost certainly have a significant impact on employers utilizing the Fluctuating Work Week method of payment to compensate non-exempt workers for overtime.  As these new rules become effective May 5, 2011, employers relying on these pay methods should take immediate action to ensure compliance.

The Fluctuating Work Week method is specifically permitted by the FLSA rules as outlined in CFR [29 CFR 778.114].  To utilize the fluctuating work week overtime payment rules, the non-exempt employee must be paid a fixed salary for all hours worked, regardless of whether the employee works less than 40 hours or more than 40 hours in a given workweek (emphasis added).  In weeks in which the employee works more than 40 hours, the employee is then paid an overtime premium for the extra hours at the rate of just 50% of the employee's regular rate of pay.  This arrangement has the potential of saving the employer money while also providing a more predictable income expectation for the employee.  (NOTE:  The Fluctuating Work Week method has been prohibited by Wage and Hour laws and the Courts in the states of California and Missouri; Pennsylvania courts have taken the position that this method cannot apply to workers paid a weekly salary.) 

To use this method of payment, certain requirements must be satisfied:

1.  There must be an understanding between the employer and the employee that the employee will be paid using the fluctuating workweek method and how it works (we have always advised our clients that this "understanding" should be documented in a written communication, obtaining a signed acknowledgement by each impacted employee);
2.  The workweek of the employee must be a fluctuating one (some weeks when the employee works fewer than 40 hours as well as some weeks when the employee works more than 40 hours - - -however, the frequency of this "fluctuation" remains undefined in the regulation);
3.  The employee must be paid a fixed salary regardless of the number of hours worked each week (this is the area impacted most by the amended regulation and will be addressed below);
4.  The salary must be sufficiently large enough so that the regular rate of pay will never drop below the minimum wage (Federal or State, whichever is greater);
5. In addition to the fixed salary, the employee must be paid overtime premiums for any hours worked over 40 in the workweek.  The overtime premium rate is 50% of the regular rate of pay for that workweek (can be tricky since the "regular rate of pay" may vary week to week, decreasing as the employee works longer hours).

Looking at the above requirements in light of the revised FLSA regulations in more detail:

1. The employer and the employee must have a clear understanding that the fluctuating workweek method will be used for paying the employee and how that method works.  It has to be made clear that the salary is meant to pay for all hours worked.  Regarding "On-Call" status, in most cases, an employee who is free to go about his/her own activities (waiting to be engaged) is not entitled to payment for this time until called or engaged.  An employee required to be on-site or otherwise significantly restricted from his/her own personal activities (engaged to be waiting) would be considered working and therefore entitled to payment for such time. Although the CFR does not require that the understanding be in writing, a written statement with signed acknowledgement of its having been communicated, provides the employer with a sound defense for the use of this method and satisfaction of this particular requirement.
2. There is no specification as to the frequency of fluctuation or degree of fluctuation that must exist; only that there must be instances of the employee working more than and fewer than 40 hours in a workweek for this requirement to be met.   
3. An attempt to use this pay arrangement without guaranteeing the "fixed salary"( i.e., the salary cannot be docked in short weeks, for tardiness, etc. - unless under a specific disciplinary action) will result in back wage liability.   In defining "fixed salary", the revised regulations specifically prohibit receipt of bonuses (other than purely discretionary bonuses such as a Christmas Bonus), commissions, or any other compensation in addition to salary stating that such payments are inconsistent with the concept and would invalidate the fluctuating workweek methodology. This narrow definition was adopted in spite of the Department of Labor's own statement that "employers sometimes pay employees other types of compensation in addition to salary as incentive compensation or for certain activities (such as working undesirable hours) and that this practice is a beneficial practice for employees".  More revealing of its disfavor of the fluctuating workweek method, the DOL made clear that its decision to not allow additional payments was intended to deter the expanding use of the fluctuating workweek method of computing overtime beyond the scope of the current regulation.

Given the new rules, employers should:

• Review current Fluctuating Work Week methodology against the revised rules;
•  Consider the option of immediately eliminating bonuses, commissions or other compensation in addition to salary for employees and continue utilizing the fluctuating workweek methodology;
• Consider the option of re-evaluating the "fixed salary" amount being paid to employees to incorporate an "educated assumption" of the typical additional compensation currently being paid and continue utilizing the fluctuating workweek methodology;
• Consider the option to keep bonus, commission or other types of compensation in your compensation model and stop using the fluctuating workweek method, returning to the traditional overtime method for non-exempt employees.  If not already in place, consider adding alternative forms of compensation that contemplate an employee receiving incentive or bonus payments in addition to normal pay.
• Create and distribute a carefully crafted communication to those employees currently working under the Fluctuating Work Week methodology, explaining the changes you are making and the reasons (DOL imposed) necessitating those changes.

RGL Consultants would welcome the opportunity to assist you in evaluating your options, developing your go-forward strategy, and creating and implementing an effective communication to your affected staff.